Academic documents -

The prudential regulation of the financial system and its influence on the development of microfinance

Álvaro José Parga Cruz y Daniel Arturo González Teller

This Research Paper was written for the International Master in Microfinance for Entrepreneurship at the Universidad Autónoma de Madrid, under the direction of Claudio González-Vega (Ph.D.). The research has attempted to answer the question: what would be the most appropriate way of regulating, from the government´s perspective, the development of microfinance, particularly in the global environment under which financial regulation has been at the center of the debate, after the events of the international financial crisis?

The microfinance industry shows a number of features that make it different from the traditional banking business. As a result, the prudential regulation and supervision frameworks should include in their vision these specific characteristics, in particular a recognition that it deals with a different risk profile, although this should not imply less market discipline. On the contrary, countries such as Peru and Colombia have been able to combine the implementation of strict norms (with good progress in the implementation of Basel III) with the development of microfinance activities, by decreeing advanced guidelines relating to more flexible amounts and terms to maturity of loans, interest rate determination and the protection of the financial consumer. Similarly, the Bolivian experience during the crisis at the end of the nineties shows that a competitive microfinance system, open to innovation in credit technologies, can provide the industry with the ability to favorably overcome periods of macroeconomic turbulence, showing an even more efficient performance than traditional banks.

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